Bank credit to grow 13% in FY27 despite high LDR constraints: Ind-Ra

India Ratings expects bank credit to grow 13 per cent in FY27, supported by GST rationalisation, lower inflation and improved consumption, though high loan-deposit ratios remain a challenge

Bank credit in India is expected to grow 13 per cent year-on-year (YoY) in the next financial year (FY27), largely driven by improved consumption demand due to GST rationalisation and lower inflation. Capital expenditure disbursals in the coming quarters will also support credit offtake, according to India Ratings.

 

However, the rating agency flagged the risk that a higher loan-to-deposit ratio (LDR) — about 82 per cent — may act as a constraint on credit expansion. It has maintained a neutral outlook on the overall banking sector for FY27. The current financial year (FY26) is expected to close with credit growth of 13 per cent.

   

“With the interest rate cycle reversing and the Reserve Bank of India (RBI) maintaining an average surplus of Rs 1.9 trillion in the banking system, the sector has taken a complete turn from a growth perspective,” India Ratings said in a statement on Wednesday.

 

This shift was largely due to improved retail credit affordability, led by a 125-basis-point (bps) repo rate reduction and a cut in the goods and services tax (GST) rate. Revised risk weights for non-banking financial companies (NBFCs) to boost credit, a revised definition of micro, small and medium enterprises (MSMEs) that doubles turnover limits, and a 2.5-times increase in investment limits — making more businesses eligible for MSME credit — have also supported growth, the agency added.

 

Between April 2024 and September 2025 — a span of six quarters — banks exercised caution in retail lending due to asset quality concerns in unsecured loans and a slowdown in NBFC lending, impacted by the RBI’s higher risk-weight requirements and lower capital market rates.

 

Tight liquidity, muted spreads and elevated LDRs made banks selective, slowing corporate lending, where private capex was already sluggish and corporates were deleveraging. The banking system began showing signs of recovery from July 2025 onwards, it added.

 

Karan Gupta, head and director, financial institutions, India Ratings, said: “Elevated LDRs remain a constraining factor for the system at 81.9 per cent in the first half of FY26, limiting loan growth in FY27 to 13 per cent.”

 

Profitability is expected to improve in FY27, largely due to better net interest margins, early signs of improvement in unsecured retail stress, and moderating credit costs (FY27: 71 bps; FY26: 78 bps), supporting a gradual recovery in earnings in the near term, Gupta added.